Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: 1Q10 Earnings Update
Prev. Ed.: October 14, 2009; Minor Changes (brokers’ materials considered till September 30)
Brokers’ Recommendations: Neutral: 60.0% (9 firms); Positive: 40.0% (6); Negative: 0.0% (0) Prev. Ed.: 9; 6; 0
Brokers’ Target Price: $56.15 (↑ $1.00 from last edition; 10 firms) Brokers’ Avg. Expected Return: 17.2%
*Note: Although dated November 9, 2009, share price and broker material are as of November 4, 2009.
Note: A Flash update on 1Q10 Earnings Update was done on October 28, 2009.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain less broker material than the broker material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
CACI International, Inc. (CACI or the Company) provides IT and network products primarily to the U.S. Federal government. The Company's primary services include systems integration, managed network products, knowledge management, engineering, simulation, and information assurance.
Key factors for determining an investment strategy for CACI are as follows:
- The Company continues to generate strong free cash flow and will likely support CACI’s aggressive acquisition program.
- CACI’s employee base has also started to increase.
Competition: Given its product suite and savvy management, CACI has been successful in winning a large percentage of the contracts on which it bids. The firms expect the Company to face stiffer competition in the years ahead, givenrobust government spending and larger contracts.
Analysts’ Opinions: 60.0% of the firms in the Zacks Digest group are neutral, 40.0% are positive, and none of the firmsgave a negative outlookon the stock. Target prices provided by the brokerage firms range from a low of $50.00 to a high of $68.00, with an average of $56.15. The expected return over the current share price provided by the firms is 17.2%. Most of the firms have valued the stock on the P/E multiple valuation method.
Cautious (Neutral or equivalent outlook) – 9 firms or 60.0% – Target prices range from $50.00 to $55.00. While the topline outlook is better than expected, the firms remain concerned about negative trends in the services space, such as falling budgets, in-sourcing, and government efforts to eliminate time and materials contracts. The firms believe that the Company is pursuing the right strategy by investing in business development to revive high-margin organic sales. CACI’s contract wins and funded orders suggest that the new business is slowing. If the Company is not successful in reviving organic growth, margins could come under further pressure, and EPS assumptions could decline. CACI does not have material exposure to many high-growth areas in the government marketplace (e.g., health care IT, information assurance), which is a growth challenge. If CACI wins higher-margin work and spur organic growth, its stock has the potential to appreciate significantly.
Bulls (Buy or equivalent outlook) – 6 firms or 40.0% – Target prices range from $52.00 to $68.00. The firms are encouraged by the cyclical precedent, positive macro trends, and the Company’s business momentum and visibility, which further strengthen their bullish view, and should be a positive for sentiment as well as multiple expansion. The firms remain optimistic with quarterly results and contract funding orders, which will lead to continued profitability momentum, going forward. Furthermore, in comparison to the S&P 500,the firms believe CACI offers greater growth opportunity and a better value. The firms believe CACI has shifted and accelerated its acquisition program to emphasize the attractive intelligence market.
General long-term outlook: CACI could be a solid long-term investment based mostly on its strong free cash flow generation. Moreover, given the likelihood that increase in civil government spending will be higher than defense spending, growing content of civil business is expected help CACI's long-term growth. However, acquisitions and heavy task order flow produce solid sales growth, but alower-margin mix remains a cause of concern. Over time, execution has improved, overall fundamentals have tilted positively, and cheap valuation offers limited downside from current levels. The firms believe CACI will continue to pursue acquisitions in the intelligence community and M&A could drive up the current estimates. The Zacks Research Digest model projects revenue increase of 9.6% (‘08-‘11 CAGR)and cash flow from operating activities increase of 2.3% (‘08-‘11 CAGR). At the bottomline, the Zacks Digest model expects EPS to increase at a three-year CAGR (‘08-‘11) of 11.0%.
November 9, 2009
Recent Events
On October 28, 2009, CACI announced its 1Q10 financial results. In 1Q10, revenue increased 12.9% y/y to $739.5 million. GAAP net income was $23.9 million or $0.78 per diluted share versus$19.6 million or $0.64 per diluted share in 1Q09.
Overview
Virginia-based CACI International, Inc. (CACI or the Company) provides information technology and communications solutions worldwide. CACI has four areas of service offerings. Systems Integration,Managed Network, Knowledge Management, and Engineering Services offerings enable clients to standardize and improve the way they manage the logistical life cycles of systems, products, and material assets. The Company provides services for U.S. national defense, intelligence and civilian agencies, agencies of foreign governments, state and local governments, and commercial enterprises. More information about the Company is available at its website
Note: On April 30, 2009, CACI International Inc (NYSE: CAI) announced that it has changed the ticker symbol of its shares on the New York Stock Exchange from "CAI" to "CACI," effective at the start of trading on Monday, May 4, 2009.
Key investment considerations as identified by the firms are as follows:
Key Positive Arguments / Key Negative Arguments- Strong competitive position expected to lead to solid growth: CACI's strong competitive position, focus on high-priority areas of spending, scale, and extensive service offering could result in solid growth, going forward.
- Slow, steady margin expansion expected: CACI has reached its operating margin bottom and is likely to see slow, steady expansion, going forward.
- Attractive business model: Most contracts in CACI's portfolio are multi-year, multi-million dollar programs. Their long-term nature and high recurring revenue lead to solid revenue visibility, and the ability to better map operating expenses and mitigate earnings volatility.
- Stringent norms: Potential defense budget cuts in the operations and maintenance account could hamper CACI’s business.
- Competitive risks:CACI faces competitive risks, such as, pricing pressure.
- Contract procurement risks:CACI is exposed to government contract procurement risks, such as, bid protests and termination risks.
Note: The Company’s fiscal year ends on June 30;fiscal references differ from the calendar year.
November 9, 2009
Revenue
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue ($ M) / 1Q09A / 4Q09A / 1Q10A / 2Q10E / 3Q10E / FY09A / FY10E / FY11ETotal Revenue / $654.8 / $728.9 / $739.5 / $736.9↑ / $744.2↓ / $2,730.2 / $2,993.3↑ / $3,182.4↑
Digest High / $655.0 / $728.9 / $739.5 / $751.7↑ / $757.2↓ / $2,730.2 / $3,020.3↑ / $3,245.0↑
Digest Low / $654.8 / $728.9 / $739.5 / $719.5↑ / $727.9↓ / $2,730.1 / $2,968.3↑ / $3,123.3↑
YoY Growth / 18.3% / 11.3% / 12.9% / 9.6% / 10.4% / 12.8% / 9.6% / 6.3%
QoQ Growth / 0.0% / 8.1% / 1.5% / -0.4% / 1.0%
Company Guidance / $2.95B-$3.05B
According to the Digest model, 1Q10 total revenue was $739.5 million, up 12.9% y/y and 1.5%q/q. The increase in revenue during the quarter was driven by higher volume of work from DoD and was generated both from organic growth and from acquisitions completed since June 30, 2008.1Q10 revenue was above the Street consensus estimate of $702.0 million.
The Company reports operating revenue in two segments: domestic operations and international operations. Domestic operations provide professional services and information technology solutions to its customers. Its customers are primarily U.S. federal government agencies. In 1Q10, domestic revenue was $711.8 million, versus $632.3 million in 1Q09. International revenue was $27.8 million, compared with $22.4 million in 1Q09.
Provided below is a summary of segment revenue as compiled by Zacks Research Digest:
Revenue ($ M) / 1Q09A / 4Q09A / 1Q10A / 2Q10E / 3Q10E / FY09A / FY10E / FY11EDepartment of Defense (DoD) / $493.0 / $563.9 / $572.3 / $559.1↑ / $567.9↑ / $2,078.3 / $2,308.4↑ / $2,493.1↑
Federal Civilian Agencies / $131.8 / $137.0 / $132.9 / $145.3↓ / $145.1↓ / $542.1 / $571.3↓ / $623.2↓
Commercial Revenue / $24.7 / $21.9 / $29.1 / $21.8↑ / $21.8↑ / $88.2 / $95.2↑ / $106.1↑
State and Local / $5.3 / $6.2 / $5.2 / $5.5 / $5.0 / $21.5 / $22.2↓ / $22.6↓
Total Revenue / $654.8 / $728.9 / $739.5 / $736.9↑ / $744.2↑ / $2,730.2 / $2,993.3↑ / $3,182.4↑
Provided below is a graphical representation of revenue by end market:
Revenue byCustomer Type
Department of Defense (DoD): Within federal, DoD revenue increased 16.1% y/y and 1.5% q/qto $572.3 million, contributing 77.4% to total revenue in 1Q10.
Federal Civilian Agencies: Revenue from the Federal Civilian Agency business increased 0.8% y/y and decreased 3.0% q/qto $132.9 million, contributing 18.0% tototal revenue in 1Q10.
Commercial: Commercial revenueincreased 17.8% y/y and 32.9% q/q to $29.1 millioncontributing 3.9% tothe total revenue in 1Q10.
State and Local: Revenue from state and local governments decreased 1.4% y/y and 15.6% to $5.2 million, contributing 0.7% tothe total revenue in 1Q10.
Major highlights and accomplishments during 1Q10include:
- Contract funding orders totaled $1.04 billion in 1Q10, up 10.5% y/y. Funded backlog was approximately $1.9 billion, up 16.0% y/y.
- A prime position on a five-year multiple award contract with a ceiling value of $494 million to provide support to the Joint Improvised Explosive Device Defeat Organization (JIEDDO).
- Contract awards had an estimated value of $732.0 million, including:
- Awards on the Strategic Services Sourcing (S3) contract vehicle with the U.S. Army totaling $325.0 million. Since March 2006, CACI has been awarded approximately $2.4 billion in task orders on this vehicle.
- Approximately $96.0 million in previously unannounced awards from the Intelligence Community.
- A $70 million award from the U.S. Navy to provide integrated logistics and engineering system support services to the Military Sealift Command.
Outlook
For FY10, management raised its revenue guidance to the range of $2,950.0-$3,050.0 million (previously $2,850-$2,950). They forecast that the directlabor and pass through revenue-growth mix will continue to be about 40.0% to 60.0%.
One firm (Cowen) believes CACI’s low margin S-3 IDIQ is a key sales growth driver in FY10.
For more details on Revenue, refer to the ‘Consensus’ tab of the CACIspreadsheet.
Margins
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 1Q09A / 4Q09A / 1Q10A / 2Q10E / 3Q10E / FY09A / FY10E / FY11EGross / 32.3% / 30.7% / 31.0% / 31.2%↓ / 31.3%↓ / 31.4% / 31.3%↓ / 31.7%↓
Operating / 6.3% / 7.2% / 6.2% / 6.5%↓ / 6.6%↓ / 6.7% / 6.6%↓ / 6.7%↓
Pre-Tax / 5.3% / 6.4% / 5.2% / 5.5%↓ / 5.7%↓ / 5.8% / 5.6%↓ / 5.9%↓
Net / 3.1% / 3.9% / 3.2% / 3.4% / 3.5%↓ / 3.4% / 3.4%↓ / 3.6%↓
According to the Digest model,gross profit was $229.0 million in 1Q10, up 8.4% y/y and 2.3% q/q. Gross marginwas 31.0% versus 32.3% in 1Q09 and 30.7% in 4Q09.
Indirect cost and selling expensesin the quarter increased 9.1% y/y and 7.2% q/q to $171.8 million, and was23.2% as a percentage of total revenue. Depreciation and amortization in the quarter was approximately $11.2 million, down6.9% y/y and up 1.9% sequentially, and was 1.5% as a percentage of total revenue.
Operating income was $46.0 million in 1Q10, up11.4% y/y but down 12.5% q/q. Operating marginwas 6.2% versus 6.3% in 1Q09 and 7.2% in 4Q09.
Interest expensein the quarter was $7.3 million, up9.0% y/y and 16.7% q/q. Pre-tax income was $38.8 million, up 11.6% y/y and down 16.2% q/q. Pre-tax marginwas5.2% versus 5.3% in 1Q09 and 6.4% in 4Q09.
The effective tax rate was 37.9% in the quarter. Net margin was 3.2% in 1Q10 versus 3.1% in 1Q09 and 3.9% in 4Q09.
Outlook
For FY10,management lowered margin guidance to 6.4%-6.7% from 6.5%-6.9% but raised its net income guidance to the range of $99.5-$105.6 million (previously $97.8-$103.9).
One firm (BB&T) believes significant margin momentum will take time to improve as the firm bids higher direct labor content task orders and converts other direct costs on existing task orders and contracts to direct labor.
With much of the Company’s strong bookings performance coming from ODCs, one firm (J.P. Morgan) expects margins to remain low at 6.4% for FY10, a 30 bps drop from FY09.
As per the Zacks Digest model, COGS is expected to increase by 9.8% y/y in FY10and6.0% in FY11; indirect cost andselling expenses are expected to increase by 10.5% y/y in FY10and 6.9% in FY11; and depreciation and amortization cost is expected to increase by 0.6% in FY10 and 7.0% y/y in FY11. In comparison, revenue is expected to increase by 9.6% in FY10 and 6.3% in FY11.
For more details on margins by individual analysts, refer to the ‘Consensus’ tab of the CACIspreadsheet.
Earnings per Share
Provided below is a summary of EPS as compiled by Zacks Research Digest:
Pro forma EPS / 1Q09A / 4Q09A / 1Q10A / 2Q10E / 3Q10E / FY09A / FY10E / FY11EZacks Consensus / $0.81 / $0.84 / $3.37 / $3.73
Digest Avg. / $0.69 / $0.95 / $0.79 / $0.83↑ / $0.86 / $3.15 / $3.43↑ / $3.73↑
Digest High / $0.71 / $0.97 / $0.83 / $0.87↑ / $0.91↑ / $3.22 / $3.60↑ / $3.93↑
Digest Low / $0.69 / $0.95 / $0.78 / $0.79 / $0.81↓ / $3.14 / $3.35↑ / $3.51↓
YoY Growth / 14.9% / 23.4% / 15.0% / 12.9% / 11.6% / 15.4% / 9.1% / 8.7%
QoQ Growth / -10.4% / 23.3% / -16.5% / 3.9% / 4.3%
Company Guidance / $3.25-$3.45
According tothe Digest model, proforma EPS in 1Q10was $0.79, up15.0%y/y but down16.5% q/q. 1Q10EPS was abovethe consensus estimate of $0.76 due to reduced net interest expense and a lower corporate tax rate.
Outlook
For FY10, management raised its EPS guidanceto the range of $3.25-$3.45 (previously $3.20-$3.40) to reflect stronger performance from operations and a lower assumed effective corporate tax rate partially offset by variable compensation expense. Diluted weighted average shares are expected to be approximately 30.6 million.
The Zacks Digest model projects EPS of $3.43 for FY10and $3.73 for FY11, with y/y increases of 9.1%and 8.7% in FY10 and FY11, respectively. The estimated 3-year compounded annual growth rate (CAGR) based on 2008 EPS is11.0%. The estimated 3-yearCAGR based on 2008 shares outstanding is 0.3%.
Highlights from the EPS table are as follows:
- 2010 forecasts (9firms) range from $3.35 to $3.60; the average is $3.43.
- 2011 forecasts (6 firms) range from $3.51 to $3.93; the average is $3.73.
One firm (Noble) believes that CACI is well positioned to achieve its goal of delivering on double-digit earnings growth in both fiscal 2010 and 2011.
Following the 1Q10earnings release, a few firms increased their FY10 & FY11EPS estimates,to reflect higher sales partially offset by lower expected margins, and a more favorable tax rate.
For more details on EPS by individual analysts, refer to the ‘EPS’ tab of the CACI spreadsheet.
Target Price/Valuation
Of the fifteen firms covering the stock, nineassignedneutral ratings andsix gave positive ratings. None of the firms gave a negative rating. Target prices for CACI range from a low of $50.00 (4.4% upside from the current price) (FBR Capital) to a high of $68.00 (41.9% upside from the current price) (Jesup & Lamont), with an average of $56.15(↑ $1.00 from previous report,17.2% upside from the current price). The firm (FBR Capital) with the lowest target price rated the stock Market Performand the firm (Jesup & Lamont) at the high end rated the stock Buy and used 8.0x FY10EV/EBITDA estimateto compute the target price. Common valuation methods used by the firms are DCF analysis, P/E multiples,EV/EBITDA,or P/FCF analysis.
Following the 1Q10earnings release, three firms increased their target pricesbased on good quarterly performance, strong positioning, lower tax rate expectations, and a growing pipeline of contract awards.
Provided below is a summary oftarget prices and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 40.0%↓
Neutral / 60.0%↑
Negative / 0.0%
Average Target Price / $56.15↑
Digest High / $68.00↑
Digest Low / $50.00↑
No. of Analysts with Target Price/Total / 10/15
Risks to the target price include changes in overall government spending policy or trends; appropriation delays; new competition within the Company’s core markets; contract negotiations or cancellations; acquisition integration difficulties; or unforeseen litigation.
Metrics detailing current management effectiveness are as follows:
Metrics (TTM) / Company / Industry / S&P 500Return on Assets (ROA) / 4.9% / 0.6% / 3.6%
Return on Investment (ROI) / 5.8% / 0.8% / 4.8%
Return on Equity (ROE) / 10.0% / 1.4% / 9.3%
ROA, ROI, and ROE of the Company are higher than the averages for the market S&P 500 of 3.6%, 4.8%, and 9.3%, respectively.
Capital Structure/Solvency/Cash Flow/Governance/Other
Balance Sheet
Exiting 1Q10, CACI hadcash and cash equivalentsof $199.8 million versus $208.5 million in 4Q09.Accounts receivable were $490.4 million versus $477.0 million in 4Q09. Days sales outstanding (DSOs) at the end of the quarter were 59, flat sequentially. Long-term debtwas $622.6 million versus $628.1 million in 4Q09. Accounts payable were $99.5 million versus $87.3 million in 4Q09.
Cash Flow
Net cash provided by operating activities was $50.9 million in 1Q10versus $56.6 million in 4Q09. Capital expenditure was $9.2 million in 1Q10 versus $3.3 million in 4Q09.
Management expects operating cash flow to be around $130.0 million for FY10. However, one firm ((J.P. Morgan) sees high potential for CACI to come in well ahead of cash from operations guidance of $130.0 million and forecasts approximately $150.0 million.
One firm (BB&T) believes CACI’s positioning within niches of the national defense and intelligence markets, in addition to its robust pipeline of opportunities,will bode well for future cash flow generation.
One firm (Stephens) believes CACI can sustainably convert roughly 120.0% of net income to cash flow.
Agreements and Contracts
On November 9, 2009, CACI announced that it had been named Government Contractor of the Year for companies with revenue greater than $300.0 million at the 7th Annual Greater Washington Government Contractor Awards.
On November 4, 2009, CACI announced that it had been awarded a $75.0 million task order to continue its support for the Army's Communications-Electronics Research, Development and Engineering Center (CERDEC) Intelligence and Information Warfare Directorate (I2WD) through the Technical Engineering Support Services (TESS) contract.
On November 3, 2009, CACI announced that it had been awarded a $23.0 million task order to provide engineering, technical, logistics and business management support to the U.S. Army Command, Control, Communications Technology (C3T) Special Projects Office (SPO).
On November 2, 2009, CACI announced that it has been awarded a $29.0 million prime task order to support financial management functions of the Joint Staff (JS) Comptroller at the Department of Defense (DoD).
On September 16, 2009, CACI received a $19.7 million contract boost from the Navy to provide technical support and engineering services to support communications efforts for a division of the service.
On September 15, 2009, CACI announced that it has been awarded a $24.5 million task order to provide Airborne, Intelligence, Surveillance, and Reconnaissance (AISR) Ground Station Support to the U.S. Army Product Manager Aerial Common Sensor.
On September 10, 2009, CACI announced it has been awarded a prime contract with a ceiling value of $47.0 million, if all options are exercised, to support the Center for Excellence in Disaster Management and Humanitarian Assistance (COE-DMHA).
On September 9, 2009, CACI announced that it has been awarded a $50.0 million contract to support the Infrared Focal Plane Array (FPA) Technology (IFT) branch of the U.S. Army's Research Development and Engineering Command (RDECOM) Communications-Electronics Research Development and Engineering Center (CERDEC) Night Vision and Electronic Sensors Directorate (NVESD).
On August 24, 2009, CACI announced that it has been awarded a $70.0 million, indefinite delivery/indefinite quantity contract for up to 7-1/2 years to provide integrated logistics and engineering system development support services to the U.S. Navy's Military Sealift Command (MSC).
On August 19, 2009, CACI announced it has been awarded an indefinite delivery/indefinite quantity task order contract to continue its support to the U.S. Army's Communications-Electronics Research, Development and Engineering Center (CERDEC) Intelligence and Information Warfare Directorate (I2WD) through the Technical Engineering Support Services (TESS) award. The contract has a ceiling value of $900 million.